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Tales of the thousand and one nights
by David Whiscombe
David Whiscombe, Director of Taxes, Berg Kaprow Lewis LLP and member of UK200 Legal Group says: ….. Well, perhaps not 1001: perhaps just more than 90 - but then again, perhaps not.
We should explain. This article is about residency in the UK – but it is also about the extent to which HM Revenue and Customs are permitted to move the goalposts – or more accurately to change the rules at half-time.
Mr Gaines-Cooper was born and bred in the UK. He had, however, business interests worldwide and in particular had a home and business interests in the Seychelles. The reason that his taxation affairs came before the Special Commissioners was because of the need to determine whether he was resident in the UK for tax purposes (the question of his domicile was also in point, but that does not concern us here). There is not space in this article to consider exactly why this was important: but, very broadly, he would be liable to UK tax on his worldwide income and gains if he were held to resident and domiciled in the UK: otherwise some or all of his foreign income and gains would be outwith the scope of UK taxes.
Law and practice on residency is an unsatisfactory mixture of very limited statute law, some case law (much of it very old, sometimes contradictory, and of doubtful application to the very different circumstances of the twenty-first century) and practice. Thus the guidance which HM Revenue and Customs have published on their approach to determining an individual’s residence status (in the form of the booklet IR20) has widely been relied upon by practitioners for many years. Under that approach, residency is largely determined by the number of days an individual has been physically present in the UK. Broadly, being in the UK for more than 90 days a year, averaged over a period of four years, is likely to be enough to constitute a person a resident of the UK.
Crucially, HMRC confirm in IR20 that “the normal rule is that days of arrival in and departure from the UK are ignored in counting the days spent in the UK”. IR20 is silent as to what, if any, exceptions to the “normal rule” there might be. Applying this test, Mr Gaines-Cooper was not resident for several of the years in question: many of the trips to the UK had been relatively short – indeed on several occasions he had flown in on one day and flown out the following day so under the IR20 rule there was no day of UK presence at all. However, for their own reasons HMRC declined to follow the guidance in IR20 and argued that it was neither necessary nor appropriate to ignore all days of arrival and departure in circumstances like those of Mr Gaines-Cooper. The Special Commissioners observed (quite correctly) that the question of residence was governed by law rather than by HMRC publications and came to their decision unfettered by IR20. They took a broader view of the meaning of “residence”: the amount of time spent in the UK was an important factor but counting the number of nights Mr Gaines-Cooper had spent in the UK was more appropriate than ignoring days of arrival and departure. On that test, Mr Gaines-Cooper slipped over the crucial 90 days’ presence and was held to be resident in the UK.
Why is the case important? At one level, it matters in any case where a question of residence has to be determined. The strict legal position is often confused and difficult to establish with certainty, being often crucially dependent on the interpretation of facts and in some cases of motives. The effective practical codification of the position afforded by IR20, though admittedly imperfect and somewhat rough and ready, has nonetheless been widely recognised as bringing a welcome degree of assurance to an uncertain area of tax law. One cannot fault the Special Commissioners for failing to apply published HMRC practice; but a similar indulgence cannot be extended to HMRC – undermining IR20 was at best unhelpful. It leaves taxpayers based overseas uncertain as to when they may safely rely upon IR20, particularly when a large number of short visits to the UK are in point. If the decision of the Commissioners is upheld by the High Court, they will now be forced to incur time and costs in revisiting what they had believed to be “safe harbour” planning and many may face unwelcome and unexpected tax liabilities. And, at a more fundamental level, it will leave many practitioners wondering what other long-established practices HMRC is preparing to jettison without warning in the quest to fill the ever-widening hole in the Chancellor’s finances. What other genies are about to be released from the lamp?...
David Whiscombe is Director of Taxes at UK200 Legal Group firm Berg Kaprow Lewis LLP and he is a member and former chairman of the UK200 Group Tax Panel (david.whiscombe@bkltax.co.uk) (admin@uk200group.co.uk).
